Rebel Traders – Analysis Without The Hype

One week ago I said to mark your calendar for on November 6th, 2009 would be the day when your local news reports that the nations unemployment rate reached 10%. Unfortunately I was correct with this economic analysis. I say unfortunately because the statistics reveal that many Americans are facing extremely hard times and today’s report shows that those facing hardship rose yet again.

The top line number says that unemployment now stands at 10.2% (U-3 measurement), but the even worse bit of news was the data under the hood. The more accurate measurement of unemployment (U-6) reveals that the distressed labor situation is now 17.5%. That was another prediction I made that unfortunately came true.

The U-6 data is defined as follows:

Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.

Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.

The full report is contained here:

Unemployment Data Released November 6 2009

With the more realistic data statistic revealing that 17.5% of Americans can’t find work or who have fallen off the rolls is very troubling. It is often said that unemployment is a lagging indicator. If we were in a cyclical recession I would agree. However this is not a ‘normal’ cyclical recession. This is a recession that grew out of the credit market demise that subsequently impacted every aspect of business, labor markets, and most of all the ability for people to spend money.

It is extremely important to differentiate the type of recession that the Unites States, and a large number of other nations is currently experiencing. A normal cyclical recession is merely an over production of goods and/or services which gets ahead of actual demand. When inventories and production exceed demand then businesses must begin to cut back. That includes cutting production, reducing the work force, and cutting costs. One thing leads to another and it quickly becomes a downward spiral. When demand reaches an equilibrium with output then a steady revenue flow is established once again and soon growth follows until the next cycle.

Cyclical recessions are actually a healthy way of re-balancing the system, to reduce the ‘bubbles’ in the system. But what we have on our hands now is a recession that resulted in runaway credit. In this case it was not a result of over production or too much inventory, it was a runaway production of credit. That runaway credit; along with Wall Street firms and banks capitalizing on that very same credit found every way possible to take that credit and leverage it to extreme levels that once things fell apart it was a monumental disaster that destroyed the foundation of the entire economy.

The parents of this recession are Mr. Wall Street and Mrs. Credit. And the marriage of these two was presided over by the Federal Government who allowed them to breed financial time bombs. Those time bombs were and still are made up of exotic mortgage backed securities, derivatives, and other types of swaps which all sought to take advantage of the runaway credit that went parabolic.

Never in the history of the United States has credit been such an influence in every aspect of our lives, the function of business, and the function of the nation as well. Credit; when kept in check is one thing, but to have allowed credit to grow (via over leveraging) it was only a matter of time before the whole thing blew up, and indeed that is what has happened.

In a normal cyclical recession eventually the demand/supply ratio gets back into alignment. That is the same thing that must happen now but only substantially more so. There is one huge problem however, the Government and banks are refusing to suffer the consequences and restore a healthy balance. Instead the banks are being flooded with liquidity in order for them to make even more credit available. The Government is enacting every possible stimulus measure it can to goose more people to take on more credit to keep the terminally ill credit system alive just one more day.

In 2008 the Financial Accounting Standards Board (FASB) was brought before Congress and they were persuaded to change accounting rules that then allowed the financial institutions and banks the ability to hide the losses in a maze of number games. Everything is being done to ‘prevent’ the natural restoration of the system. The administration is attempting to convince the American people that they are able to report a growing GDP.  But that growth is on the backs of bailouts, stimulus spending to goose the data, and by the changes in accounting rules to name just a very few. All the while the real issue is not being addressed and only festers more and more under the disguise of a shinny new suit, lipstick, and new shoes. Remove that shinny apparel and we still have an economy that is on life support.

One of two things will happen. One is that the system will be allowed to finally balance itself which means the credit system will be allowed to return to healthy levels once again. Doing so will be extremely painful for the economy as it will mean losses will be forced out. The other thing that would happen is the result if the first one does not occur. And that second option will be far worse than anything we have seen yet as the credit system continues to expand by artificial means. The end result of such action is very likely to put the United States in a situation where its own reliance on credit can no longer be extended. The nation will reach ‘end game’.

The nation is at a crossroad, either the Government takes the proper course to balance the system, or it will head down a dead end road. Right now it appears that the Government is revving the engine and is about to head towards the dead end at full speed.

We already know this, but at least there is some press about it now.

Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation.

Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).

“There has been nothing like this in the USA since the 1930s,” he said. “The rapid destruction of money balances is madness.”

he M3 “broad” money supply, watched as an early warning signal for the economy a year or so later, has been falling at a 5pc annual rate.

Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an “epic” 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.

“For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew,” he said. [...]

[...] “The current drive to make banks less leveraged and safer is having the perverse consequence of destroying money balances,” he said. “It strengthens the deflationary forces in the world economy. That increases the risks of a double-dip recession in 2010.”

Referring to the debt-purge policy of US Treasury Secretary Andrew Mellon in the early 1930s, he added: “The pressure on banks to de-risk and to de-leverage is the modern version of liquidationism: it is potentially just as dangerous.”

US banks are cutting lending by around 1pc a month. A similar process is occurring in the eurozone, where private sector credit has been contracting and M3 has been flat for almost a year. [...] Source: Telegraph (ht Butch)

Everyone wants to know “has the market bottomed” ?

Everyone from financial commentators (CNBC), professional Wall Street analysts, economists, and of course let us not forget the US Government are all in disagreement over what happens next.

The very same people who in 2007 said such things as…

• The economy is in great shape
• The market will continue to go up
• The growth of foreign economies will save our economy (reference to exports)
• I don’t believe the US will enter a recession
• and the market has bottomed (said many times over the past 12 months)

…are the same people once again trying to convince the American people that the market has bottomed, the economy is stabilizing, and it is once again time to buy stocks for the long term.

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